The Central Bank Everything Bubble

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Bull Oak Capital


  • As the central banks play their musical chair tune, we all have no choice but to play along.
  • Though, the music will have to stop at some point.
  • Just don't be the last one without a chair.

Today's marketplace is a peculiar one. When I look at the current market, I like to think that it is similar to the children's game of musical chairs. As long as the Fed and the other major central banks are playing their tune, everybody is happy to play along. In fact, I don't think investors have much of a choice. However, once the music stops, it is important to make sure that your aren't the only one left standing.

Perhaps I'm being a bit dramatic, but I think the major central banks are playing a dangerous game. Low interest rates and Quantitative Easing do not come without a cost. What that cost is, nobody knows for sure. But I suspect this debt, despite its form or who is issuing it, is just like any other type of debt. It is borrowing from the future. In the Fed's case, by creating record low interest rates, returns (stock returns, bond returns, etc.) are brought from the future and consumed today.

"Debt is future consumption brought forward. Once debt is incurred, consumption that might have happened in the future won't happen…We forget that debt used for consumption doesn't create new supply. It simply pulls supply forward in time. The problem is that debt can't do this forever. Pulling your consumption forward to the present means you will consume less later." - John Mauldin

Yes, returns since 2009 have been impressive. Chances are, if you've purchased an asset (of any type) within the past 5-7 years, you've done quite well. Stocks are at an all-time high. Bond yields have sank as their prices have rallied with stocks. Real property prices have rebounded.

When asset prices increase, investors assume they will continue to increase into perpetuity. It is natural to expect this. It is within our human nature

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Bull Oak Capital is a San Diego Financial Planner located in downtown San Diego, California. We help our clients by providing Financial Advice and Portfolio Management services. We pride ourselves on providing an easy-to-understand business model, fee transparency, and excellent client service.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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